Give This Column Five Stars on Yelp, Please

This week saw a small sliver of resistance in the growing movement to regulate the Internet. In Levitt v. Yelp! Inc., a federal appellate court dismissed a lawsuit by small-business owners who claimed that Yelp had tried to bully them into buying advertising by removing favorable reviews of their services.

Yelp gets a lot of bad press. In April, the Federal Trade Commission disclosed that it has received more than 2,000 complaints about Yelp's business practices over the past six years. In recent years, any number of lawsuits have been filed by companies complaining about the site's tactics. A spokeswoman told the Wall Street Journal that Yelp receives an average of six subpoenas a week.

Yelp reviews matter. A 2011 study by Michael Luca of Harvard Business School calculated that each additional star in a Yelp rating for a restaurant results in a 5 to 9 percent increase in revenue. A later study by Luca and Georgios Zervas of Boston University found that the number of "fake" restaurant reviews on Yelp is rising dramatically, with many posted by establishments seeking to counter bad reviews from diners.

In Levitt, however, a panel of the U.S. Court of Appeals for the Ninth Circuit concluded that even if, as the plaintiffs allege, Yelp manipulates reviews and ratings to reward those who advertise and punish those who don't, the practice doesn't violate California law. Yelp's alleged activities might represent hard bargaining, but, contrary to the claims of the plaintiffs, they do not represent extortion. (And it's important to keep in mind that the case was dismissed before trial, so we don't know whether Yelp really did what it was accused of. The court's point was that no trial was necessary, because even were the allegations true, there wouldn't be a case.)

The court explained the governing principle this way: "Unless a person has a pre-existing right to be free of the threatened economic harm, threatening economic harm to induce a person to pay for a legitimate service is not extortion." So even if Yelp tried to strong-arm the business owners into buying ads by using its ability to decide which reviews to post, it would have been within its rights to do so. Yelp, as a private company, is free to publish any reviews it wishes.

I think the court is right. Assuming that the allegations in the complaint are true -- and, remember, they're still unproved -- Yelp's practices might not be neighborly or attractive. But they don't fall within any practical definition of extortion. They're just tough bargaining.

The panel drew an analogy to an earlier case in which the owner of a mobile-home park threatened to force residents to pay their own utility bills unless they signed the leases he preferred. This, too, was held not to be extortionate, because the landlord undoubtedly had the right to require tenants to pay their own utilities. This mattered because "what you may do in a certain event you may threaten to do." In other words: It does not violate any right of mine for you to threaten to do what you have the undoubted right to do.

When I teach contracts to first-year law students (a task I am beginning this very week), I find that among the hardest concepts for them to grasp is the idea that some nasty threats are legally wrongful and some aren't. But in the business world -- indeed, in markets generally -- the distinction is crucial.

Consider the simple example of a parent who says to a teenager: "Yes, you can go, but only if you take your little brother with you." From the point of view of the teen, the company of a little brother may represent a terrible burden. But the teen also knows that the parent has the freedom to say, "No, you may not go at all."

Now move to a simple business context. A company in distress seeks the immediate sale of an underperforming asset, A. The only buyer with whom a quick cash deal is possible says, "Sure, I'll buy A, but not unless you also throw in B." As it happens, B is an overperforming asset the seller would very much prefer to keep. But its choices are to sell B as well or to lose the deal. The buyer's threat to walk isn't wrongful, because the buyer has no obligation to buy in the first place.

The later study by Luca and Zervas also bears directly on the litigation. They tested for "advertiser interaction effects" and found no statistically significant relationship between a company's decision to advertise on Yelp and the quality of the reviews that survive the site's filtering process.

Still, as the authors note, they were able to test only for special treatment for those who currently advertise, and their data set would not detect possible discrimination other than through the filtering of posted reviews. Perhaps we will learn more in future litigation.

For many of Yelp's supporters in the dispute, of course, these fine points about wrongful threats aren't the real point. Such groups as the Electronic Frontier Foundation are more worried about the dangers of the regulation of website content deemed to be harmful to a particular business.

These are serious concerns, to be sure. But the contracts professor within me is happy enough with the freedom-of-contract implications of the decision, and the reaffirmation of the principle that not everything that is unadmirable or even immoral should also be illegal.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

Stephen L. Carter, a Bloomberg View columnist, is a professor of law at Yale University, where he teaches courses on contracts, professional responsibility, ethics in literature, intellectual property, and the law and ethics of war.
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